CMBS borrowers more ruthless in default decisions

by Ryan Smith17 Jan 2014
A new analysis shows that commercial real estate borrowers make more ruthless default decisions than Freddie Mac borrowers.

A study released Thursday by Freddie Mac shows that commercial mortgage-backed security borrowers are more likely to exhibit “ruthless” default behavior – defaulting immediately when the debt coverage ratio falls below 1.0 or the loan-to-value ratio rises above 100% -- than Freddie Mac borrowers. CMBS borrowers were also more likely to default during stressed or volatile market conditions.

Borrowers were also more likely to default if they had loan terms of less than seven years, while borrowers with longer terms were more likely to keep loans current during weak market conditions “because the property owner has more time to improve the property’s operations and performance,” according to Freddie Mac.

The study also showed that Freddie Mac borrowers were generally less ruthless in their default decisions, suggesting Freddie borrowers can generally withstand adverse market conditions.

"We found that if a borrower has access to capital and overall liquidity, they are less likely to default and will support the property until the market improves," said David Brickman, senior vice president of Freddie Mac Multifamily.
 

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